Global action for a global currency

Markets have rallied further on the last trading day of the month on the coordinated announcement from the major central banks to reduce the rate payable on their dollar swap lines (by 50bp). On one level, this could be interpreted as a sign that things are particularly bad because central banks are getting together and taking action. Alternatively, it is a reflection of the fact that the dollar is a global currency currently in short supply.

We err more towards the latter. The strain in dollar-funding markets has been evident for some time and we’ve written about it on several occasions. Central banks introduced such dollar-funding lines in the wake of the credit crisis back in 2008 and they have largely remained in place ever since, even if not utilised on an ongoing basis. The fact that they have been adjusted into year-end should also not be that surprising given that this is when the need for liquidity tends to be greatest. It’s a reflection of the fact that the dollar is a global reserve currency that is currently in short supply and is different from central banks taking a coordinated approach to monetary policy changes, something which has occurred on a far less frequent basis.